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Aggregation across each nation: aggregator choice and macroeconomic dynamics

Author

Listed:
  • Lisack, Noemie

    (Banque de France)

  • Lloyd, Simon

    (Bank of England)

  • Sajedi, Rana

    (Bank of England)

Abstract
We study the implications of trade aggregation in an infinite-horizon economy with multiple countries. Specifically, we ask whether there is a role for alternatives to the Armington aggregator in the workhorse open-economy macroeconomics model. We show analytically that the first-order dynamics of the model are entirely captured by a few sufficient statistics, so that the precise choice of functional form for the trade aggregator is irrelevant. This irrelevance result has the following implications. For given steady-state trade elasticities and expenditure shares, any aggregator that is homogeneous of degree one is equivalent to the Armington aggregator at first order. Similarly, aggregators that are homogeneous of arbitrary degree are equivalent to a simple generalisation of the Armington aggregator, for given steady-state trade elasticities and expenditure shares. In models with more than two countries, alternative aggregators can play a role by allowing for steady-state differences in bilateral trade elasticities across different country pairs, which the Armington aggregator rules out.

Suggested Citation

  • Lisack, Noemie & Lloyd, Simon & Sajedi, Rana, 2022. "Aggregation across each nation: aggregator choice and macroeconomic dynamics," Bank of England working papers 982, Bank of England.
    • Handle: RePEc:boe:boeewp:0982
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    References listed on IDEAS

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    1. Freeman, Rebecca & Larch, Mario & Theodorakopoulos, Angelos & Yotov, Yoto, 2021. "Unlocking New Methods to Estimate Country-specific Trade Costs and Trade Elasticitie," School of Economics Working Paper Series 2021-17, LeBow College of Business, Drexel University.

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    More about this item

    Keywords

    International trade; open-economy macroeconomics; Armington aggregator; elasticity of trade.;
    All these keywords.

    JEL classification:

    • F00 - International Economics - - General - - - General
    • F10 - International Economics - - Trade - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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